If you want to get out of debt fast, you’re going to need to take control of your own situation. Begin by writing down everyone you owe money to, how much you owe, and what your interest rate is for each of those debts. With all this info handy, you can then decide what method works better for you; debt-snowball or debt-avalanche.

The debt-snowball method

American finance author Dave Ramsey came up with the debt-snowball method and it has gained much popularity over the years. Basically, you start by paying off your smallest debts (by dollar amount) first before moving onto the larger ones. The idea here is to get instant satisfaction whenever you eliminate one of your debts which will, in theory, encourage you to pay off the rest of your debts.

Keep in mind that you still need to make the minimum required payment on all of your debts, but any extra money available should be put towards your smallest debt. Once that first debt is paid off, move on to your next one. Repeat this process until you’re debt-free.

The sense of accomplishment you get after paying off each debt may be worth it psychologically, but by using this method, you end up paying more in interest charges in the long run. From a straight numbers perspective, using the debt-avalanche method makes more sense.

Related: Debt repayment options

The debt-avalanche method

The debt-avalanche method works in the same method as the debt-snowball method, but in this case, you start with your highest interest debts first. In most cases, this would be your credit card debt, car loans, and student debt.

Credit cards tend to have pretty high-interest rates, think 19.99%+ so clearly it makes the most sense to pay that down first compared to a debt that may only have a 5% interest rate. The obvious advantage of the debt-avalanche method is that you’ll save a ton of money in the long run since you’re focusing on high-interest debts first.

The only “problem” with this method is if you end up having a large balance on your credit cards. At times. it can definitely seem like you’re not even making a dent on your debt loads. It may seem like it’s taking longer to pay off your other debts, but you’ll actually get out of debt faster since there will be less interest paid.

Final thoughts

Which debt repayment method you choose is ultimately up to you, but as long as you stick to one method, you’ll be in good shape. The snowball-method will give you small victories while the avalanche-method will save you money in the long run. Either way, you’ll be focusing on reducing your debt and that’s what matters most.

Which option you choose will depend on various factors including; how much you owe, your income, your current expenses, and your credit rating. Making the right choice can be tough and it may require you to make sacrifices, but at least you have options.

Debt repayment options that help

Debt repayment plan – Regardless of how much debt you may have, it’s a good idea to have a debt repayment plan in place. This isn’t anything special, it’s simply a plan to help you get out of debt. Some people prefer to pay off their highest interest credit card first, while others prefer to pay off their lowest balance; the idea is to have a plan in place so you’re actively working towards paying off your debt.

Consolidation loan –  This is a single type of loan which traditionally comes from a bank. It combines all your outstanding debt so you end up paying all of your creditors at the same time. Besides making payments easier, consolidation loans usually have a lower interest rate making debt repayment much faster. If approved, the bank will pay off all of your outstanding debts on your behalf, you then make payments just to them.

Marketplace lending – Also known as peer-to-peer lending (P2PL), marketplace loans are a relatively new debt repayment option that is starting to become more popular. It’s basically a fixed-term consolidation loan that comes from accredited investors, who are anonymously and securely matched up with people who are looking to borrow through a P2PL company. With marketplace loans everything is done online so there’s no need to apply in person.

Unlike a traditional consolidation loan, marketplace loans encourage you to get out of debt. “Debt consolidation is a smart move if you can find a product with a lower rate and that will let you pay the debt off” says Andrew Graham, CEO at Borrowell. “We think our fixed-term loan product is a responsible way for someone to take control of their debt. A debt consolidation loan allows someone to pay off other debts and consolidate it all into one convenient monthly payment.”

Consumer proposal – This might not seem like a positive option, but it’s better than bankruptcy. A consumer proposal is a debt repayment plan made with your creditors with the help of a licensed trustee. With the proposal, you agree to pay a portion of what you owe to your credits and in return, they forgive any outstanding debt once you’re done paying down the proposal.

“A consumer proposal is a great alternative to bankruptcy for many debtors,” says Douglas Hoyes, a Trustee at Hoyes, Michalos & Associates.” You get the advantages of bankruptcy without some of the disadvantages.” You don’t lose your assets and once the creditors agree to your proposal, your payment remains fixed even if your income changes. In some circumstances, you might still be required to pay the entire portion of your debt, but a 0% could apply.

Beware of debt settlement companies and “debt consultants” that aren’t licensed. A federally licensed consumer proposal administrator does not charge upfront fees, so if you’re ever asked for an upfront fee, the odds are you’re not dealing with a legit company.

Debt repayment options to avoid

Payday loans – These are the worst and should be avoided at all costs, yet a recent Joe Debtor study done by Hoyes, Michalos, & Associates shows that payday loans are way up! Some people who run into credit card debt believe that they have no choice and see payday loans as a real option. Payday lenders are smart with their marketing, I’ve seen ads that offer a “Free $200 cash advance” or “$3 to borrow $300”. It’s no surprise people think they’re getting a deal, but when you read the fine print you could end up paying 800% interest, which makes your debt much worse.

Credit cards – You can’t technically pay off one credit card with another, but you can get a cash advance assuming you have available credit on the other card. The problem with this method is that you’ll end up paying a higher interest rate, and it starts compounding immediately– obviously you should never seriously consider this option.

Bankruptcy – This is literally your last resort. It’s time to consider bankruptcy when your debts are far beyond what you can repay on your own. Your debts will be totally cleared, but your credit will also be negatively affected and a note will be left on your credit file for many years.

It’s not just credit score that gets affected. “First, you must report your income to your trustee each month, and if your income increases, your payments while bankrupt may increase,” says Hoyes. “Second, in a bankruptcy, you lose certain assets.”

If bankruptcy is your only option, a licensed trustee will help you administer the process. Payments are based on your income and can last up to 21 months. There’s also a chance you’ll lose some of your assets, but at least once you’ve made your final payment, all your eligible unsecured debts will be discharged and you can start fresh.

Final thoughts

If we’re not careful, our debt can get out of control, and as you’ve read, some debt repayment options actually do more harm than good. Taking control of our finances early is the best step since obviously, we want to avoid bankruptcy or a consumer proposal, but if we leave our things unchecked we may not have a choice.

If you’re not sure how to handle your current situation, seek out a professional that can help you get back on track.

Making generic resolutions is just silly, we need to pick goals that are actually attainable. Here are some common financial goals and tips to help you meet them.

Pay off debt

We would all like to pay off our debt but depending on how much we owe it may be next to impossible to pay it off in a single year. Instead, try to focus on paying a portion of the debt and set up up a repayment plan.

For example, let’s say we have $20,000 in consumer debt, maybe paying down $6,000 is a realistic number for us this year. That would mean we need to set aside $500 a month to meet our goal. Setting up a debt repayment plan and sticking to it is a much more realistic financial goal.

Make more money

This is one of those goals that we all make but it just not realistic. Getting a raise would be great, finding a higher paying job would be awesome, but both aren’t exactly easy in this economy.

Making more money isn’t out of reach, we just need to be a bit creative about how to earn that extra income. How about selling some of the crap stuff we no longer use on Craigslist or picking up a side hustle (part-time job)?

Increase my RRSP contributions

Making a larger RRSP contribution means we’ll get a bigger tax refund but how can we contribute more with so many other things going on? How about investing the tax refund we’re about to get after filing our taxes? Re-investing your tax refund every year will just help compound your contributions. This of course assumes we don’t owe money.

Another strategy is to set up an automatic savings plan through our bank so regular contributions are made immediately. If your employer offers any type of RRSP matching plan, be sure to take advantage of it.

Save more money

In theory, saving more money should be one of the easiest financial goals, even if we save just ONE extra dollar we’ve met our goal right? Technically yes but we shouldn’t be too proud about saving an extra dollar. How about aiming a little higher?

An easy way to save more money is to simply cut some of our spending. Look at your monthly bills/spending and it shouldn’t be too hard to find a few places where you can trim your expenses.

Stick to a budget

Here’s the thing about budgets, they’re impossible to stick to if we don’t have a realistic one set up. Before we can set up a budget, we need to track our spending, literally write down everything that you spend money on for a month. Once we know our spending habits it’ll be easy to make adjustments.

Also note that there are different ways to budget. Some of us prefer to use a cash-based system, whereas others prefer to always track their spending through budgeting software. Just find a system that works for you and stick to it.

Improve my financial knowledge

We all want to take better control of our finances, but those technical terms can be pretty intimidating. I’ve said this before and I’ll say it again, just read a book and you’ll have a much better understanding of how to make your money work for you. There’s a ton of great resources out there and if you read just one of them, you’ll probably know more about personal finances than 80% of the population.

Final thoughts

Sticking to any goal you make can be easy as long as the goal is realistic. What’s the point of setting a massive goal if you have no chance of obtaining it? You’re just setting yourself up for disappointment.

According to the poll the average household debt for Canadians now sits at $76,140, the average last year was $72,045. Most of us don’t even know how much money we have in our bank accounts so how can we realistically expect to know how much debt we have?

In Alberta household debt almost doubles those living in Ontario ($124,838 vs. $67,507).  Traditionally Alberta has been considered one of the “cheaper” provinces to live in but if Albertans are carrying twice as much debt does that really make it cheaper or is it all an illusion?

Credit Card Debt

One positive thing found in the report is that only 52% of us are now carrying a credit debt, that’s down 56% from the previous year. So we’re clear, there is nothing to be proud of when more than half of Canadians are carrying a balance on their credit cards. Any debt on your credit card is too much debt.

I don’t want to preach here but if you can’t  pay off the full balance on your credit card at the end of the month then it means you can’t afford whatever you just bought.

Interest rates are insanely high on credit cards, if you’re carrying a balance you need to make paying it off a priority. Don’t even think about your RRSP or TFSA, get rid of that credit card debt first!

Mortgage Debt

Interesting enough the survey reveals that 43% of us have mortgage debt yet it’s estimated nearly 70% of Canadians are homeowners. I wouldn’t be surprised if the difference in numbers are those home owners that are mortgage free but I find it very hard to believe that the national average for debt is only $76,140.  Based on vagueness of the report I have to assume it adds mortgage debt, credit card debt and student debt so it just doesn’t add up.  Regardless it’s really meaningless since there is no way to verify these numbers.

Yes mortgages can be considered a good debt but too many of us take on too much debt when buying a home.  My friend Robb Engen over at Boomerandecho described it best in his recent post 35 Thoughts On Turning 35.

 “Tens of thousands of dollars have been wasted because home builders and real estate agents invented terms like “starter homes” and “trading up”.  Buy a home that’ll suit you for the next decade or more.”

I wouldn’t be surprised if hundreds of thousands of dollars have been wasted when you consider how much money banks are willing to lend us for our first home. Crunch those numbers and make sure not to borrow excessively just to say you’re a homeowner. The last thing you want to be is house poor.

Final Word
Sure banks and credit card companies encourage us to borrow and spend more than we can afford but in the end, we only have ourselves to blame when we get into the debt trap. Just because money is cheap and incredibly easy to access doesn’t mean we should borrow and spend ourselves into debt.